A surprise surge in inflation to its highest level in months has raised fears of another interest rate hike that would add to the heavy burden on mortgage holders.

The monthly consumer price index, which measures household inflation such as the cost of goods and services, rose 4 per cent over the 12 months to May.

That was above expectations for a 3.8 per cent lift and also up from the 3.6 per cent increase in April.

The data was compiled by the Australian Bureau of Statistics in its monthly report, marking the third increase in the annual rate in a row.

Housing, food and non-alcoholic beverages, transport and alcohol and tobacco were the biggest contributors to the annual growth.

The last time inflation was higher was in November, when it hit 4.3 per cent.

Housing rose 5.2% in the 12 months to May, up from 4.9% in April

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— Australian Bureau of Statistics (@ABSStats) June 26, 2024

The Reserve Bank has been trying to keep a lid on inflation by increasing interest rates.

At its most recent meeting 10 days ago, it left official interest rates on hold at 4.35 per cent, where they have been since November.

Since May 2022, surging inflation has prompted a series of aggressive interest rate hikes, piling pressure on mortgage holders.

Comparison website Canstar said household’s payments were about $1500 a month higher on a $600,000 loan over 30 years compared to April 2022.

Stalling progress on lowering inflation suggests borrowers will have to wait months longer for interest rate relief.

Asia-Pacific economist for Indeed Callam Pickering told the ABC the data would be a “nasty upside surprise” for the RBA, and that Australian households and businesses should prepare for another rate hike.

EY chief economist Cherelle Murphy said Wednesday’s data had jolted financial markets, which were again seriously considering the possibility of a further rate hike.

“The Reserve Bank will have the more comprehensive June-quarter CPI reading at the end of July, before its next board meeting in August,” she said.

“All things considered, it’s likely to point to inflation being too high, so our view is the cash rate will at least need to remain restrictive for some time. A rate hike is not out of the question, given the Reserve Bank has little tolerance for upside surprises.”

The monthly consumer index is not as comprehensive as the quarterly update, which is still considered the principal measure of inflation.

The June-quarter edition will be keenly anticipated by the Reserve Bank ahead of its August meeting.

RateCity.com.au research director Sally Tindall said it would be “the moment of truth for the RBA”.

“If it’s way off track, the board will have no choice but to act, potentially as soon as August,” she said.

“The wait-and-see approach has suited the RBA up until now. However, the reality is, after five consecutive meetings on hold, the board is running out of runway to keep going in this holding pattern.”

Tindall said the stage-three tax cuts, which take effect from Monday, might fuel the case for another rate hike.

“But they’ll also serve as a lifeline for many borrowers if another one eventuates,” she said.

“If you’ve got a mortgage, start preparing for another one, if not two rate hikes today, if you haven’t done so already.

“You can do this by negotiating with your bank for a lower rate, but also by reviewing your home loan features to make sure you’re maximising the tools available to reduce your interest bill.

“It’s also worth spending the time looking at the option of refinancing … A mortgage rate that starts with a ‘5’ will put you in good stead to tackle whatever the next six to 12 months holds.”

Economists had predicted another strong outcome in the latest data. That was partly due to base effects, with Wednesday’s inflation figure measured against May last year, when there was a large fall.

ABS head of prices statistics Michelle Marquardt said with volatile items excluded, underlying inflation moderated to 4 per cent, down from 4.1 per cent in April.

“Consumer price index inflation is often impacted by items with volatile price changes like automotive fuel, fruit and vegetables, and holiday travel,” she said.

While the cash rate remained unchanged at the RBA’s June meeting, the board described the economic outlook as highly uncertain. Its wariness was in part attributed to stronger-than-expected consumption and a minor uptick in inflation.

The RBA board next meets on August 5-6.

-with AAP